The Hershey Company (NYSE: HSY) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 28, 2020. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise noted. The filing is unaudited.
Business context
Hershey sells confectionery and snack products across North America and international markets. North America generated about 93% of second-quarter sales. COVID-19 reduced sales in international markets, owned retail and travel retail, while U.S. retail takeaway remained positive. The company said its manufacturing plants were open and supply-chain disruption had so far been minimal.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,707.3 | $1,767.2 | $3,744.6 | $3,783.7 |
| Gross profit | $792.6 | $874.7 | $1,659.2 | $1,767.2 |
| Gross margin | 46.4% | 49.5% | 44.3% | 46.7% |
| Operating profit | $383.4 | $410.1 | $766.2 | $848.9 |
| Operating margin | 22.5% | 23.2% | 20.5% | 22.4% |
| Net income attributable to Hershey | $268.9 | $312.8 | $540.0 | $617.2 |
| Diluted EPS, common stock | $1.29 | $1.48 | $2.58 | $2.93 |
- Q2 performance: Sales decreased 3.4%, net income fell 14.0%, and diluted EPS declined 12.8% year over year. Higher gross profit was not achieved despite lower selling, marketing and administrative expense; lower gross profit and a higher effective tax rate were the main earnings headwinds.
- Cash flow: First-half operating cash flow was $614.0 million, versus $679.3 million. Capital additions, including software, were $185.8 million; operating cash flow less capital additions was approximately $428.3 million. Cash dividends paid were $314.3 million and share repurchases were $211.2 million.
- Liquidity and debt: Cash and equivalents were $1.165 billion at quarter-end, up from $493.3 million at year-end 2019. Current assets were $2.903 billion and current liabilities $2.215 billion. Short-term debt was $198.3 million and total long-term debt, including its current portion, was $4.880 billion; combined carrying debt was approximately $5.078 billion. The company reported compliance with credit-facility covenants.
Changes versus the comparable period
- North America sales rose 1.0% in Q2 and segment income increased 5.7%, supported by pricing and lower promotional and advertising spending; volume decreased 3.8%.
- International and Other sales fell 38.0% in Q2, and the segment recorded a $4.0 million loss versus $21.9 million income a year earlier. Management cited pandemic-related disruption, particularly in Mexico, export markets, owned retail and travel retail.
- U.S. total retail takeaway increased 4.1% in measured channels; candy, mint and gum takeaway increased 3.2%, with an approximately 227-basis-point market-share gain.
- Q2 gross margin declined 310 basis points. Management attributed the reduction mainly to unfavorable commodity-derivative mark-to-market activity, higher freight and logistics costs, and COVID-related plant expenses, partly offset by pricing and productivity.
Outlook, commentary and risks
- Management characterized the financial effects of COVID-19 as temporary, but said the full-year impact remained uncertain and depended on the pandemic’s duration and severity, economic recovery and government actions. The filing provides no clear full-year sales or EPS guidance.
- Expected 2020 capital expenditures, including capitalized software, were approximately $400 million to $450 million. The company continued strategic supply-chain capacity projects but expected its ERP implementation to be delayed by about one year after selectively pausing work.
- Hershey issued $1.0 billion of notes in Q2, with maturities from 2025 to 2050 and stated coupon rates from 0.900% to 2.650%; it also repaid $350 million of notes that matured in May. Management said the financing helped mitigate potential pandemic-related risks and that liquidity was sufficient for cash needs.
- Unusual items included first-half unfavorable commodity-derivative mark-to-market activity of $103.4 million versus the prior-year period, $9.1 million of long-lived-asset impairment charges, and a Q2 non-cash pension settlement charge. The Margin for Growth program was completed in Q2.
- Risks include continued pandemic disruption to demand, retail traffic and operations; commodity, freight and raw-material costs; price-related volume elasticity; international-market weakness; supply-chain interruption; and ERP execution. Tax audits are ongoing; management said adequate provision had been made. Ordinary-course legal matters were not expected to have a material effect.
Important facts for investors to verify
- Whether international demand, retail and travel-related sales recover, and whether COVID-19 effects remain temporary as management expected.
- How much reported margin and earnings volatility reflects commodity-derivative mark-to-market timing versus underlying input costs; the filing describes the derivatives as economic hedges.
- Whether North American pricing and market-share gains can offset lower volumes, cost inflation and reduced promotional activity.
- Debt, cash and working-capital trends, including the effect of inventory growth and the timing of seasonal cash needs.
- Progress on the ERP schedule and the stated $400 million to $450 million capital-spending range; confirm subsequent filings for updated outlook and any changes to risk or contingent matters.